IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v47y2016i4d10.1007_s11156-015-0539-8.html
   My bibliography  Save this article

Decimalization, IPO aftermath, and liquidity

Author

Listed:
  • Charlie Charoenwong

    (Nanyang Technological University)

  • David K. Ding

    (Massey University
    Singapore Management University)

  • Tiong Yang Thong

    (James Cook University Australia)

Abstract

We investigate the effect of decimalization on the aftermarket trading of NYSE-listed IPOs. We find that the relation between bid–ask spread and underpricing becomes negative post-decimalization, suggesting that benefits from the increased price competition accrue more to hot IPOs. The quoted depth is generally smaller post-decimalization due to a higher probability of front running, which aggravates the cost of adverse selection and limit order submission. We show that underwriters continue to provide price support but are only willing to cover the initial short position, if profitable to do so. Decimal pricing does not affect the flipping strategy of institutions for cold IPOs as they are likely bound by the underwriter’s price support and their share allocation. Institutions, however, tend to flip more hot IPOs during the post- than in the pre-decimalization period, suggesting that the cost of flipping is lower for shares with a substantial price run-up during aftermarket trading.

Suggested Citation

  • Charlie Charoenwong & David K. Ding & Tiong Yang Thong, 2016. "Decimalization, IPO aftermath, and liquidity," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1303-1344, November.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:4:d:10.1007_s11156-015-0539-8
    DOI: 10.1007/s11156-015-0539-8
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-015-0539-8
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-015-0539-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Chowdhry, Bhagwan & Nanda, Vikram, 1996. "Stabilization, Syndication, and Pricing of IPOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(1), pages 25-42, March.
    2. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
    3. Hsuan‐Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, vol. 55(3), pages 1105-1131, June.
    4. Lee, Charles M C & Mucklow, Belinda & Ready, Mark J, 1993. "Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 345-374.
    5. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    6. Katrina Ellis & Roni Michaely & Maureen O'Hara, 2000. "When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket," Journal of Finance, American Finance Association, vol. 55(3), pages 1039-1074, June.
    7. Bessembinder, Hendrik, 2003. "Issues in assessing trade execution costs," Journal of Financial Markets, Elsevier, vol. 6(3), pages 233-257, May.
    8. Benveniste, Lawrence M. & Busaba, Walid Y. & Wilhelm Jr., William J., 1996. "Price stabilization as a bonding mechanism in new equity issues," Journal of Financial Economics, Elsevier, vol. 42(2), pages 223-255, October.
    9. Fishe, Raymond P. H., 2002. "How Stock Flippers Affect IPO Pricing and Stabilization," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(2), pages 319-340, June.
    10. Bacidore, Jeffrey & Battalio, Robert H. & Jennings, Robert H., 2003. "Order submission strategies, liquidity supply, and trading in pennies on the New York Stock Exchange," Journal of Financial Markets, Elsevier, vol. 6(3), pages 337-362, May.
    11. Robin K. Chou & Wan-Chen Lee & Sheng-Syan Chen, 2005. "The Market Reaction Around Ex-Dates of Stock Splits Before and After Decimalization," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 8(02), pages 201-216.
    12. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    13. repec:bla:jfinan:v:59:y:2004:i:5:p:2339-2374 is not listed on IDEAS
    14. Moez Bennouri & Sonia Falconieri & Daniel Weaver, 2011. "Trading Mechanism, Ex-post Uncertainty and IPO Underpricing," Post-Print hal-00740063, HAL.
    15. Harris, Lawrence E, 1994. "Minimum Price Variations, Discrete Bid-Ask Spreads, and Quotation Sizes," The Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 149-178.
    16. Schultz, Paul H. & Zaman, Mir A., 1994. "Aftermarket support and underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 35(2), pages 199-219, April.
    17. Laurie Krigman & Wayne H. Shaw & Kent L. Womack, 1999. "The Persistence of IPO Mispricing and the Predictive Power of Flipping," Journal of Finance, American Finance Association, vol. 54(3), pages 1015-1044, June.
    18. Shane A. Corwin & Jeffrey H. Harris, 2001. "The Initial Listing Decisions of Firms that Go Public," Financial Management, Financial Management Association, vol. 30(1), Spring.
    19. Sugato Chakravarty & Robert A. Wood & Robert A. Van Ness, 2004. "Decimals And Liquidity: A Study Of The Nyse," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(1), pages 75-94, March.
    20. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    21. Van Ness, Bonnie F & Van Ness, Robert A & Pruitt, Stephen W, 2000. "The Impact of the Reduction in Tick Increments in Major U.S. Markets on Spreads, Depth, and Volatility," Review of Quantitative Finance and Accounting, Springer, vol. 15(2), pages 153-167, September.
    22. Butler, Alexander W. & Grullon, Gustavo & Weston, James P., 2005. "Stock Market Liquidity and the Cost of Issuing Equity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(2), pages 331-348, June.
    23. Ellis, Katrina, 2006. "Who trades IPOs? A close look at the first days of trading," Journal of Financial Economics, Elsevier, vol. 79(2), pages 339-363, February.
    24. Krishnan, C.N.V. & Singh, Ajai K. & Zebedee, Allan A., 2006. "An examination of large sell orders in cold IPO aftermarkets," Journal of Financial Markets, Elsevier, vol. 9(2), pages 119-143, May.
    25. Reena Aggarwal & Pat Conroy, 2000. "Price Discovery in Initial Public Offerings and the Role of the Lead Underwriter," Journal of Finance, American Finance Association, vol. 55(6), pages 2903-2922, December.
    26. Ekkehart Boehmer & Gideon Saar & Lei Yu, 2005. "Lifting the Veil: An Analysis of Pre‐trade Transparency at the NYSE," Journal of Finance, American Finance Association, vol. 60(2), pages 783-815, April.
    27. John Y. Campbell & Tarun Ramadorai & Tuomo O. Vuolteenaho, 2004. "Caught on Tape: Predicting Institutional Ownership With Order Flow," Harvard Institute of Economic Research Working Papers 2046, Harvard - Institute of Economic Research.
    28. Goldstein, Michael A. & A. Kavajecz, Kenneth, 2000. "Eighths, sixteenths, and market depth: changes in tick size and liquidity provision on the NYSE," Journal of Financial Economics, Elsevier, vol. 56(1), pages 125-149, April.
    29. Chung, Kee H. & Chuwonganant, Chairat, 2002. "Tick size and quote revisions on the NYSE," Journal of Financial Markets, Elsevier, vol. 5(4), pages 391-410, October.
    30. Hanley, Kathleen Weiss & Kumar, A. Arun & Seguin, Paul J., 1993. "Price stabilization in the market for new issues," Journal of Financial Economics, Elsevier, vol. 34(2), pages 177-197, October.
    31. Chung, Kee H. & Charoenwong, Charlie & Ding, David K., 2004. "Penny pricing and the components of spread and depth changes," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 2981-3007, December.
    32. Ruud, Judith S., 1993. "Underwriter price support and the IPO underpricing puzzle," Journal of Financial Economics, Elsevier, vol. 34(2), pages 135-151, October.
    33. Hegde, Shantaram P. & Miller, Robert E., 1989. "Market-Making in Initial Public Offerings of Common Stocks:An Empirical Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(1), pages 75-90, March.
    34. Blume, Marshall E & Goldstein, Michael A, 1997. "Quotes, Order Flow, and Price Discovery," Journal of Finance, American Finance Association, vol. 52(1), pages 221-244, March.
    35. Katrina Ellis & Roni Michaely & Maureen O'Hara, 2002. "The Making of a Dealer Market: From Entry to Equilibrium in the Trading of Nasdaq Stocks," Journal of Finance, American Finance Association, vol. 57(5), pages 2289-2316, October.
    36. Reena Aggarwal, 2000. "Stabilization Activities by Underwriters after Initial Public Offerings," Journal of Finance, American Finance Association, vol. 55(3), pages 1075-1103, June.
    37. Lee, Charles M. C. & Radhakrishna, Balkrishna, 2000. "Inferring investor behavior: Evidence from TORQ data," Journal of Financial Markets, Elsevier, vol. 3(2), pages 83-111, May.
    38. Katharina Lewellen, 2006. "Risk, Reputation, and IPO Price Support," Journal of Finance, American Finance Association, vol. 61(2), pages 613-653, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Thanos Verousis & Pietro Perotti & Georgios Sermpinis, 2018. "One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 353-392, February.
    2. Kobana Abukari & Isaac Otchere, 2020. "Has stock exchange demutualization improved market quality? International evidence," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 901-934, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jones, Steven L. & Yeoman, John C., 2014. "Initial uncertainty and the risk of setting a fixed-offer price: Implications for the pricing of bookbuilt and best-efforts IPOs," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 194-215.
    2. Bradley, Daniel J. & Gonas, John S. & Highfield, Michael J. & Roskelley, Kenneth D., 2009. "An examination of IPO secondary market returns," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 316-330, June.
    3. Jos Van Bommel & Jay Dahya & Zhihong Shi, 2010. "An empirical investigation of the speed of information aggregation: a study of IPOs," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 2(1), pages 47-79.
    4. Khelifa Mazouz & Sam Agyei-Ampomah & Brahim Saadouni & Shuxing Yin, 2013. "Stabilization and the aftermarket prices of initial public offerings," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 417-439, October.
    5. Griffin, John M. & Harris, Jeffrey H. & Topaloglu, Selim, 2007. "Why are IPO investors net buyers through lead underwriters?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 518-551, August.
    6. Li, Mingsheng & Eisenstadt, Robert C., 2005. "Price support and spreads in the IPO aftermarket: An empirical microstructure study," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(4-5), pages 748-766, September.
    7. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    8. Katharina, Lewellen, 2004. "Risk, Reputation, and the Price Support of IPOs," Working papers 4453-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    9. Craig W. Holden & Stacey Jacobsen & Avanidhar Subrahmanyam, 2014. "The Empirical Analysis of Liquidity," Foundations and Trends(R) in Finance, now publishers, vol. 8(4), pages 263-365, December.
    10. Boehmer, Ekkehart & Fishe, Raymond P. H., 2004. "Underwriter short covering in the IPO aftermarket: a clinical study," Journal of Corporate Finance, Elsevier, vol. 10(4), pages 575-594, September.
    11. Edwards, Amy K. & Hanley, Kathleen Weiss, 2010. "Short selling in initial public offerings," Journal of Financial Economics, Elsevier, vol. 98(1), pages 21-39, October.
    12. Chen, Zhaohui & Wilhelm Jr., William J., 2008. "A theory of the transition to secondary market trading of IPOs," Journal of Financial Economics, Elsevier, vol. 90(3), pages 219-236, December.
    13. Tim Jenkinson & Howard Jones, 2007. "The Economics of IPO Stabilisation, Syndicates and Naked Shorts," European Financial Management, European Financial Management Association, vol. 13(4), pages 616-642, September.
    14. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4, July-Dece.
    15. Ellis, Katrina, 2006. "Who trades IPOs? A close look at the first days of trading," Journal of Financial Economics, Elsevier, vol. 79(2), pages 339-363, February.
    16. Xin Zhao & Kee H. Chung, 2006. "Decimal Pricing and Information‐Based Trading: Tick Size and Informational Efficiency of Asset Price," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5‐6), pages 753-766, June.
    17. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2013, January-A.
    18. Arnab Bhattacharya & Binay Bhushan Chakrabarti, 2014. "An Examination of Adverse Selection Risk in Indian IPO After-Markets using High Frequency Data," International Journal of Economic Sciences, Prague University of Economics and Business, vol. 2014(3), pages 01-49.
    19. Jiao, Yawen & Kutsuna, Kenji & Smith, Richard, 2017. "Why do IPO issuers grant overallotment options to underwriters?," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 34-47.
    20. Albuquerque, Rui & Song, Shiyun & Yao, Chen, 2017. "The Price Effects of Liquidity Shocks: A Study of SEC’s Tick-Size Experiment," CEPR Discussion Papers 12486, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Decimalization; IPO aftermath; Underpricing; Liquidity;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G19 - Financial Economics - - General Financial Markets - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:47:y:2016:i:4:d:10.1007_s11156-015-0539-8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.